Katz to sell two pharmacy business units to McKesson

MISSISSAUGA, Ontario – Katz Group Canada has agreed to sell its two banner pharmacy businesses, Drug Trading Co. and Medicine Shoppe Canada, to McKesson Corp. in a $920 million (Canadian) cash deal.

Drug Trading provides purchasing, merchandising and other value-added services to some 850 independent pharmacists under the Guardian and I.D.A. banners, while Medicine Shoppe Canada performs the same functions for its 160 ­independent pharmacy franchisees.

Along with acquiring all of the assets of Drug Trading and the shares of Medicine Shoppe Canada, McKesson also agreed to buy a joint ownership interest in ProPharm’s pharmacy software application, which is used by the associated independent pharmacies.

McKesson will retain its status as the primary pharmaceutical distributor for Katz’s corporately owned stores as well as the Drug Trading and Medicine Shoppe Canada units that are involved in the sale.

The purchase, announced late last month, is expected to close in the first half of 2012 pending customary closing conditions, including all necessary Canadian competition policy and other regulatory clearances.

“The anticipated addition of the banner and franchise operations of Katz Group to our Canadian business reinforces McKesson’s ongoing commitment to the independent segment,” said John Hammergren, chairman and chief executive officer of McKesson. “This acquisition is a great example of using the strength of our balance sheet to reinforce the value we bring to our customers, while creating value to our ­shareholders.”

The acquisition is expected to be neutral to McKesson’s adjusted earnings in its current fiscal year and accretive in the first year after closing.

Katz chairman Daryl Katz commented, “This transaction unlocks significant value through the sale of two outstanding but noncore assets. We will intensify our focus on our corporately owned Rexall and Rexall/Pharma Plus store network to accelerate the growth of our Rexall brand and the value proposition it represents to our patients and customers. We will also accelerate the growth of our related real estate interests.”

The same day that it unveiled the sale to McKesson, Katz also announced that it had acquired Dell Pharmacies, an 18-store chain in southern Ontario with sales of about $70 million. The Dell stores are slated to be integrated into the Rexall ­network.

With the Katz purchase, McKesson Canada now moves into the leadership position — ahead of Shoppers Drug Mart Corp. (SDM) — in terms of store count and pervasiveness in the Canadian market.

The deal adds 1,100 independent pharmacies to McKesson Canada’s approximately 600 outlets, which operate under three banners: Proximal, Associated Retail Pharmacy and Family Health Care Pharmacy.

A corporate lawyer by background and the son of an Edmonton, Alberta-based pharmacist, Daryl Katz was no stranger to the world of community pharmacy when he founded Katz Group Canada over a decade ago. And he has had remarkable success since then.

Although the sale to McKesson slashes the number of outlets that privately held Katz controls, the remaining corporate stores represent a significant force in the Canadian community pharmacy universe.

The two units being sold off by Katz have distinctly different histories. The venerable Drug Trading, the largest integrated pharmacy banner in Canada, had its origins in 1897. The Medicine Shoppe franchise operation was established in Canada only in 1991, but it has steadily expanded to its 160-plus store base under both its original and current Katz ­management.

In recent years Katz has been focusing on its large-format Rexall Healthy Living stores. The capital freed up by the current sale will allow it to accelerate the conversion of more stores to this now-proven concept as well as enable the company to make more opportunistic purchases of other pharmacy assets, such as those acquired in the Dell Pharmacies deal.

When provincial governments began overhauling — and substantially reducing — community pharmacy reimbursement from the dispensing process, it was anticipated that such measures would set in motion a wave of consolidations in the drug store sector. Operators, it was believed, would seek to achieve efficiencies of scale to offset their loss of revenue.

The two major publicly held corporate chains, SDM and the Jean Coutu Group, publicly stated their keen interest in making acquisitions. It was expected that independents would be particularly interested in monetizing their assets in a situation where they were more dependent on pharmacy revenue than their larger, corporate competitors.

However, the value of prescription files has remained relatively high, and the pace of consolidation has been slower than expected.

Yet the moves by McKesson and Katz may signal a change. McKesson Canada’s president, Nick Loporcaro, indicates that the company’s appetite for new affiliates has not been satisfied by the Katz deal.

As a result, both SDM and Coutu may well be spurred to accelerate their acquisition ­programs, in light of the recent developments.

Further opportunity in the scramble for stores and volume has been presented by a recent announcement by Target Corp. The U.S. discount store chain’s management has indicated that, in its acquisition of up to 135 Zellers stores, it plans to establish new franchise arrangements with the pharmacists who are slated to own and operate the pharmacy departments, rather than simply take over the current ­operations.

That decision implies that over the next 18 months Zellers will likely be putting up for sale all of the pharmacy customer files in the stores that Target is acquiring. It can be expected bidding will be vigorous and that potential buyers will not be confined to corporate and voluntary pharmacy chains. Mass merchants and supermarkets are also likely to be interested.

It is not yet known what the fate of the remaining 138 Zellers stores not covered in the Target deal will be, but it is likely that they also will eventually be disposed of.